The Finance Minister was uniquely positioned to present a landmark Budget, as Budget 2008 comes in the backdrop of robust economic growth in GDP of 8.7 per cent in 2007-08. The manufacturing and services sector have grown at a scorching pace for the second year in running. Manufacturing grew by 10.7 per cent in real terms and services by 9.4 per cent.
Agricultural growth remained sluggish at 2.6 per cent. It is, therefore, not surprising that one of the principle overarching themes of the Budget is to raise public investment on agriculture and allied industries. The government also recognises that India has the potential to realise a demographic dividend, whereby a larger part of our population will join the workforce in the years to come. This is, however, contingent on our ability to enhance the skill base of our people and make them more employable by substantially increasing investment in education and health. A secondary, but equally important, theme of the Budget is to meet the aspiration of the common man by reining in inflation, easing supply side constraints through duty reduction, improving basic infrastructure like roads, power, drinking water, medicare and sanitation.
The Finance Minister remains committed to fiscal prudence. The budgetary estimates for 2008-09 project that continuing with the current trend past couple of years, revenue deficit will go down in absolute terms from Rs 71,478 crore to Rs 55,184 crore and also in percentage terms to 1 per cent of the GDP from 1.5 per cent for 2007-08. Similarly, gross fiscal deficit is projected to be at 2.5 per cent of the GDP from 3.3 per cent in the immediately previous year. However, this is without the recommendations of the Sixth Pay Commission and could be revised upwards.
The focus of the Budget remains the common man and includes a number of proposals aimed at increasing his spending power, which in turn will boost consumption and investment. The proposals include raising farm credit target to Rs 2,80,000 crore from Rs 2,25,000 crore, waiver of loans worth Rs 60,000 crore given to farmers, raising personal income threshold limits from Rs 1,10,000 to Rs 1,50,000.
From industry’s point of view, the Budget does not change the peak rates of customs duty. It reduces customs duty on commodities, which are inflationary. Sectorally, the Budget has positive implications for sectors like banking, automobile, engineering, infrastructure, pharmaceuticals, FMCG and media. It is neutral for sectors like IT, metals, oil & gas, retailing, textiles, telecom and real estate and is negative for the cement sector.
From the capital market point of view, the consumption demand is going to percolate down to corporate earnings. However, the increase in short-term capital gains tax from 10 per cent to 15 per cent is a negative, particularly from the FIIs point of view as it increases their cost of doing business in India. It could have been avoided, as the tax collection figures have been buoyant in the last few years.
To sum up, whether it is Budget or elections, investors should take longer term view of any development and then take informed investment decisions. The clear winners would be the companies managed by great managements with sound business models and purchased at reasonable valuations with adequate margins of safety.
(Motilal Oswal is Chairman and Managing Director of Motilal Oswal Financial Services)